Friday, January 30, 2009

All of America is upset about Wall Streets bonuses. Even The President is pissed. Guess what. All of America, including President Obama, is wrong. It's easy to say oh these already-super-rich CEOs are just lining their own pockets with taxpayer money, but that's a knee jerk reaction with no thought behind it. All of those billions in bonuses did not just go to CEOs. They went to tens hundreds of thousands of American workers. They went to traders and portfolio manager and secretaries and HR people. It was money that was promised to those workers as part of their compensation. It was money that many probably used to pay for their kids college tuition or pay off their credit card bill from Christmas or maybe just for the basic staples of life. Maybe they used it to pay their mortgages. If you just think a little, then maybe you won't be so outraged. Maybe you'll realize that it shouldn't even be any of your business.

But of course it is everyone's business because of the government bailouts of the banks. Worse we have all been brainwashed into blaming things on the greed of Wall Street. That is the great red herring of this depression. Politicians want you to think that all of our problems are the result of the greed of Wall Street. If you have a scapegoat to blame things on, then you do not have to take any responsibility.

So if it's not Wall Street's fault, then whose fault is it? There is an easy and a hard part to that. The easy part is that it is the government's fault. It is the fault of the Federal Reserve for using its unconstitutional power to amplify business cycles. The Fed created a climate of malinvestment by fixing interest rates at unsustainably low levels. And guess what, they continue to do this. The seeds of the next recession are already being sown today.

That's the easy answer. The harder answer is that its your fault. Its the fault of every American who bought houses they could not afford. Its the fault of every American who constantly refinanced their house to "cash out" their equity. This carpe diem approach has lead to historically low savings in America, historically high debt, and historically high rates of loan default and foreclosures. Those are the real reasons why any bank would be a fool to loan out money right now. No matter how much money the government gives them, it will never make any sense to loan it out. The people who would borrow are not likely to be able to pay it back.

Back to reality. Nobody is going to accept personal responsibility. It's the government's job to saves us from ourselves, right? I actually thought for awhile that maybe people would (rightfully) blame the government, but that has not happened either. The politicians have cleverly manipuated the masses to put the blame on banks and Wall Street greed. Now we are pissed that those banks are paying the salaries of their employees instead of lending money. It's obvious what is next. We take over those banks and force them to lend money to everybody. Then we will get what we deserve.

9 comments:

"It was money that was promised to those workers as part of their compensation."

No. Having worked at a hedge fund, I can assure you that bonuses are never, ever promised. A salary is promised, just like every other salaried job. Bonuses are entirely discretionary and based on performance. Judging by the "performance" of these institutions over the last year, none of those bonuses are deserved.

You're correct that most of the bonuses didn't go to CEOs. But I assure you that most of the bonuses went to the traders, portfolio managers, risk managers, compliance officers, and financial engineers whose collective decisions caused a significant part of this crisis. (Not all of it, granted, but certainly a significant part.) These people are already earning salaries (the promised part, pre-bonus) that puts them in the top 10% or 1% of income-earners in the US. I assure you the secretaries and HR people aren't taking home the bulk of the bonus. And, as I've said, they're already getting paid a salary. You know, to do their jobs.

Furthermore, seeing how many of these firms went bankrupt or are near-bankruptcy, the first people that should be outraged over the bonuses are the shareholders. How are companies entering into bailout agreements with the US government, agreements that include provisions which can potentially severely dilute existing shareholders, and at the same time handing out massive bonuses to employees? That's a massive dereliction by the boards and by management of their fiduciary responsibilities to their shareholders. In fact, I'd call it criminal.

And if public money (being spent to supposedly save the financial system) is going towards bonuses, then I think the taxpayer should be angry too.

It is a common mistake to extrapolate from your personal experience and try to generalize. The policy of the hedge fund you worked at may or may not apply to other security related businesses. Much of the fuss in particular was over Merril Lynch. I happen to know a portfolio manager there, and even joking harassed him about this yesterday. For him at least, his bonus was based on the performance of his funds relative to the rest of the market. You can argue for or against that, but ultimately that compensation strategy is determined by his employer.

I agree that shareholders would have a right to question compensation of any employees of the company. If you read the first sentence of the second paragraph of the post, then you would see that I also agree that it has become everyone's business because of the government bailout. However I will continue to contend that politicians are simply leading the public around by the nose and giving them an easy scapegoat.

>It is a common mistake to extrapolate from your personal experience and try to generalize. The policy of the hedge fund you worked at may or may not apply to other security related businesses. Much of the fuss in particular was over Merril Lynch. I happen to know a portfolio manager there, and even joking harassed him about this yesterday.

from one hand you are talking about generalizing from one example while you are doing the same thing (using a friend's example). I do not see how your argument is stronger.

Also, the issue is not that executives got bonuses, that's fine, the issue is that the *same* people made these risky deals knowing the government would help. Now they got the bailout money but they still act as if nothing happened as if they deserved this. I think everybody who is paying taxes entitled to feel angry about this. Simply because it's our money.

(Also, cash is cash there is not such thing as a bailout account and a bonus account.)

Over generalizations are bad, I will agree. However, I was responding to the statement that "On several counts you're just factually wrong. For example: ... I can assure you that bonuses are never, ever promised." The easiest way to disprove these statements was with a simple counter-example.

However both you and Jorge prove my point. You get all worked up over these people's bonuses. You follow the red herring just as the politicians hope. I am sure you will agree with those same politicians when they conclude that our only choice is to seize control of the banks in order to save the economy.

Your counterexample, as it was phrased in your comment, doesn't disprove my point. You said: "For him at least, his bonus was based on the performance of his funds relative to the rest of the market."

Just because his bonus is based on his performance relative to the market doesn't mean it's not discretionary.

But perhaps you're right and Merrill Lynch was contractually obligated to pay him a performance bonus (which I doubt), I think it's still negligent of Merrill to promise bonuses to its employees before it can protect its shareholders against losses.

>I am sure you will agree with those same politicians when they conclude that our only choice is to seize control of the banks in order to save the economy.

I presume those bad, tricky politicians must be Democrats, since loyal Republicans would not support the biggest nationalization in the US history (wait, they voted for the bailout package under Bush.)

Anyway, the bank nationalization question is not that simple. Even the Economist acknowledged that collecting the toxic assets in bad, government controlled banks while freeing the 'good banks' is not necessary a bad strategy.

That being said just because I think we continue to encourage risky investment behavior by doing exactly what the investors hoped (ie worst case scenario, the government will help out without any condition), that does not mean that I want the government to nationalize every single bank.

(for the record, I am not even against the bail out. I think it was unavoidable but the process was not overseen the way it should have been.)

>I am sure you will agree with those same politicians when they conclude that our only choice is to seize control of the banks in order to save the economy.

I presume those bad, tricky politicians must be Democrats, since loyal Republicans would not support the biggest nationalization in the US history (wait, they voted for the bailout package under Bush.)

Anyway, the bank nationalization question is not that simple. Even the Economist acknowledged that collecting the toxic assets in bad, government controlled banks while freeing the 'good banks' is not necessary a bad strategy.

That being said just because I think we continue to encourage risky investment behavior by doing exactly what the investors hoped (ie worst case scenario, the government will help out without any condition), that does not mean that I want the government to nationalize every single bank.

(for the record, I am not even against the bail out. I think it was unavoidable but the process was not overseen the way it should have been.)

@Anon: Clearly a new reader :-) I think there is very little difference between Democrats and Republicans. Both of them want to use the power of the government to get what they want. They like to make you think that their always exactly two sides two any issue, the left and the right. You are right that the government has probably validated some of their risk calculations. Maybe those analysts deserve an even bigger bonus!